The places where mobile payments are skyrocketing also happen to be where corrupt governments, transnational crime syndicates, and traffickers of all stripes flourish.

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Earlier this month, US prosecutors took down the global currency exchange Liberty Reserve and charged it with being the largest online money laundering operation in history, the "bank of choice for the criminal underworld." More than a million customers used the Costa Rica-based company to wash more than $6 billion, according to an indictment. Besides drug traffickers, it alleged, Liberty Reserve's illicit users included a wide array of gangsters and thugs, and criminal organizations engaged in credit card and investment fraud, identity theft, computer hacking, and child pornography.

But while Liberty Reserve and similar currency exchanges are getting a lot of attention these days from regulators and enforcement agencies, another global money-laundering frontier is not: mobile payments. Millions of people now use their mobile phones to do their banking, especially in developing parts of the world, and their numbers are growing daily. And hidden among them are criminals who some experts believe are engaged in just as wide a range of criminal activity as those using Liberty Reserve, albeit on a smaller scale - for now.

"M-payments will be one of the next big laundering methodologies that we have to confront," says according to John Cassara, who spent 26 years as a covert CIA case officer and US Treasury agent investigating financial crimes. "It's difficult for law enforcement around the world to get a handle on this problem because there is a lack of understanding and reporting about it. But sooner rather than later, we are going to be confronted with this issue."

Here's the problem: Landline-based telecoms and banking networks are expensive to build, which is one reason why only one in five of the world's 7 billion people have direct access to banks and financial services. But there are 5 billion cellphones out there that could be used as virtual wallets, or personal ATMs. By 2020, some experts predict, there will be 50 billion connected devices, and m-payments will be most likely be the most popular form of banking in much of Africa, Asia, and Latin America.

However, the places where m-payments are skyrocketing also happen to be where corrupt governments, transnational crime syndicates, and traffickers of all stripes flourish. "This is going to be huge," says Cassara, who has written two books on terror finance, wrote a State Department report on m-payments in 2008, and now advises governments and multinationals on the subject. "People using their phones to do their banking will put a serious dent in credit cards and ATMs, and it will have a major impact on how money is hidden and laundered." The trouble, he says, is that "nobody is really looking at this in terms of, well yeah, but how are criminals taking advantage of this?"

Here's how it works: The best example of m-payments is Kenya, where Safaricom launched one of the first mobile payment programs, called M-Pesa, in 2007. (Pesa means "money" in Swahili). M-Pesa now has 15 million users, who transfer more than $1 billion per month in East Africa. Its model is being imitated in more than 50 other countries, including much of Africa, Brazil, Afghanistan, and India.

Thousands of street corner shops in Kenya sell mobile phone airtime, usually in the form of scratch cards. More than 60,000 of them have also registered as M-Pesa agents, far outnumbering Kenya's 840 bank branches. Annual transactions on M-Pesa are equivalent to over 20% of the country's GDP. Customers exchange cash for virtual value that goes into their phone, which becomes an electronic wallet or stored value card. They can then pay bills, buy things, transfer money and, importantly, receive credit on the card.

Besides being easy to use, it's usually cheaper than traditional money-transfer services. Foreign workers can be paid by phone, and then transmit the money to their family back home in seconds. Travelers can deposit lots of cash and then simply withdraw it in another country. Many big banks are now rushing to incorporate m-payments, and so are multinationals like McDonalds Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX), and The Western Union Company (NYSE:WU).

Here's where the system breaks down: M-payments are most popular in countries with weak laws and enforcement against financial fraud and money-laundering. Customers often need little in the way of identification. The whole process often bypasses a country's financial reporting system. That makes it almost impossible for authorities to monitor m-payments, even if they had the expertise - which, Cassara and others say, they don't.

But such stories aside, there isn't much evidence of m-payments facilitating crime. Cassara says that's only because no one is monitoring the transactions for criminal activity. Financial authorities in Africa, Asia, Europe, and the United States would seem to agree, and have been raising concerns in recent reports, official testimony and public speeches (paywall). They're especially worried about the rise of m-payments in countries where the informal money-transfer system known as hawala has stymied their efforts to track terrorist financing. In Pakistan, for instance, where 90% of adults don't use banks, a firm called Easy Paisa has more than 100 million subscribers. When Cassara travels overseas and finishes one of his presentations, "They're all concerned," he says. "They all nod their head, they all know [this] is going to be a problem but nobody does anything."